december 2012 submitted to: namibia manufacturers ...€¦ · 9.1 cost reflectivity ... included...

Electricity Price Comparison

December 2012

Submitted to:

Namibia Manufacturers

Association (NMA) P O Box 20810

Windhoek Namibia

Tel +264 (0)61 233206 Fax +264 (0)61 233360

Submitted by:

EMCON (Pty) Ltd P O Box 1900

Windhoek Namibia

Tel +264 (0)61 224725 Fax +264 (0)61 233207

Email [email protected]

NMA - 2012 Electricity Cost Comparison

November 2012 of 21

Contents

1 INTRODUCTION ........................................................................................................................................ 4

2 HOW ELECTRICITY TARIFFS ARE DERIVED IN NAMIBIA ............................................................................ 4

3 APPROACH AND METHODOLOGY ............................................................................................................ 8

3.1 Approach ............................................................................................................................................ 8

3.2 Assumptions / Limitations / Notes ..................................................................................................... 8

4 BACKGROUND .......................................................................................................................................... 9

4.1 NamPower Trend ............................................................................................................................... 9

4.2 General Electricity Price Developments in Namibia ......................................................................... 10

4.3 Domestic vs Commercial Prices ........................................................................................................ 11

5 KEY FINDINGS ......................................................................................................................................... 12

5.1 The Tariffs ......................................................................................................................................... 12

5.2 Comparing Namibia to its Neighbours ............................................................................................. 12

5.3 Development Over Time .................................................................................................................. 14

5.4 Comparing Different Areas in Namibia ............................................................................................ 16

6 ADDITIONAL ISSUES ............................................................................................................................... 18

6.1 Access Charges vs Demand Charges ................................................................................................. 18

6.2 Future Electricity Pricing Outlook ..................................................................................................... 18

7 CONCLUSIONS ........................................................................................................................................ 18

8 POSSIBLE NMA ACTIONS ........................................................................................................................ 19

9 ANNEX: A BRIEF INTRODUCTION TO ELECTRICITY PRICING TERMINOLOGY.......................................... 20

9.1 Cost Reflectivity ................................................................................................................................ 20

9.2 Tariff Structure and Charges ............................................................................................................ 20

9.3 Tariff Level ........................................................................................................................................ 20

9.4 Pricing Signals ................................................................................................................................... 21

9.5 Average Energy Cost ......................................................................................................................... 21

9.6 Load Factor ....................................................................................................................................... 21


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Figures

Figure 1: The Namibian ESI Structure .............................................................................................................. 4

Figure 2: Typical Daily Load Curve ................................................................................................................... 5

Figure 3: Electricity Price Build-up ................................................................................................................... 7

Figure 4: Electricity Price Composition ............................................................................................................ 7

Figure 5: NamPower Average Price ................................................................................................................. 9

Figure 6: Namibia Electricity Sourcing ........................................................................................................... 10

Figure 7: Namibia Electricity Price Development .......................................................................................... 10

Figure 8: Commercial vs Residential Tariffs in Namibia ................................................................................ 11

Figure 9: Commercial vs Residential Tariffs in RSA ....................................................................................... 11

Figure 10: Electricity Tariffs ........................................................................................................................... 12

Figure 11: Average Electricity Cost for Different Consumers ........................................................................ 13

Figure 12: Average Electricity Cost – Windhoek vs Johannesburg ................................................................ 13

Figure 13: Fixed Cost / Total Bill .................................................................................................................... 14

Figure 14: Average Price Difference between ZA and NA ............................................................................. 14

Figure 15: Average Commercial Price Development ..................................................................................... 15

Figure 16: Fixed Charges vs Total Bill ............................................................................................................ 15

Figure 17: Commercial Electricity Cost per Area in Namibia ......................................................................... 16

Figure 18: Demand Charges per Area in Namibia ......................................................................................... 16

Figure 19: TOU High Season Rates ................................................................................................................ 17

Figure 20: TOU Low Season Rates ................................................................................................................. 17


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1 INTRODUCTION

The NMA has approached EMCON in 2004 to conduct an electricity price comparison between Namibian and South African municipalities. Updates to this analysis were done in 2007 and 2011.

This present report updates the 2011 report and draws some comparisons to the status quo in 2004, 2007 and 2011.

2 HOW ELECTRICITY TARIFFS ARE DERIVED IN NAMIBIA

In Namibia the electricity industry is regulated by the Electricity Control Board (ECB). The ECB functions under the Electricity Act of 2007 and within national energy policies as developed by the Ministry of Mines and Energy. All participants in the electricity industry have to obtain licenses for their activities from the Minister of Mines and Energy, and are referred to as “licensees”. Figure 1 below illustrates the structure of the Namibian electricity supply industry (ESI):

Figure 1: The Namibian ESI Structure

The flow of electricity in Figure 1 is from left to right.

Electricity has to be generated (produced) somewhere, either by generators in Namibia or by generators outside Namibia from where electricity is imported. In Namibia NamPower currently does


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almost all generation of electricity, and NamPower is also responsible for import, export and trading of electricity.

The final compound generation price of electricity is a mix of the costs of the various generators and import sources. This generation price varies from hour to hour and from day to day as demand rises and falls and different generators are called upon to fulfil the demand. Figure 2 shows how the demand for electricity in Namibia varies during a typical day:

Figure 2: Typical Daily Load Curve

The main implications from Figure 2 are as follows:

Some generators can run throughout the day and night to fulfil some 60% of peak demand. These are called base load generators and usually have the lowest running cost because their fixed costs can be recovered over many running hours, they usually run on the lowest cost fuels and have the highest fuel efficiency;

Some generators must run mostly during the day but not at night. These are called mid merit generators and usually have a higher cost than the base load generators, partly because their fixed cost must be recovered over less running hours than base load generators and partly because they often run on more expensive fuels (and at lower fuel efficiency) than base load generators; and

Some generators run only for one or two hours per day, usually in the early evening to fulfil the daily peak at that time. These are called peaking generators and usually have the highest cost because their fixed costs must be recovered from very few running hours and they often run on the most expensive fuels and at the lowest fuel efficiency.

The differing generation costs at different times lead to the term time-of-use and are the main reason for having time-of-use energy tariffs.

The main cost components for sourcing electricity in Namibia are:

Daily Load Pattern - All Observations

All Load Meters

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Pro

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f A

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aily

Pe

ak

Time of Day


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The fixed costs related to paying for the generator assets;

The cost of fuel used by the generators;

The operating and maintenance costs of running the generators; and

The cost of imports of electricity.

Once the electricity has been generated it needs to be transported from the place of generation to the places of consumption. This transport process is divided into two parts namely transmission and distribution. Transmission is the long distance transport, usually at very high voltages, and distribution is the transport from the nearest transmission end point to the consumers’ premises.

In Namibia transmission is done exclusively by NamPower. Namibia has a very long transmission network in order to cover all areas of the country. Consumption of electricity in Namibia is low in relation to the extent of the transmission network, leading to a high cost of transmission relative to countries with a higher population density.

The cost of transmitting electricity in Namibia is made up of two main components:

The fixed costs related to paying for the transmission network assets; and

The operating and maintenance costs of running the transmission network.

In Namibia the compound cost of generating, importing and transmitting electricity results in NamPower’s so called price for bulk electricity. Some large end consumers buy directly from NamPower at this bulk price, and the distributors also buy their electricity from NamPower at this bulk price. When referring to “NamPower price increases” this bulk price of electricity is referred to. Most end consumers are affected by this price only through their electricity distributors, which add their own costs before selling to the end consumer.

Distribution of electricity in Namibia is done mostly by three regional electricity distributors (REDs) plus a number of local and regional authorities as well as NamPower distribution in areas where no REDs have been formed. Within the RED areas the local and regional authorities are no longer involved in the distribution of electricity (however many of them receive a local authority surcharge (LAS) on electricity sold in their area, which is effectively a local authority tax. Levels of this “tax” vary significantly between areas.).

The cost of distributing electricity in Namibia is made up of four main components:

The fixed costs related to paying for the distribution network assets;

The operating and maintenance costs of running the distribution network;

The cost of providing customer services to consumers; and

Local authority surcharge.

To arrive at an end consumer price for electricity the generation, transmission and distribution costs must be added up. This is illustrated in Figure 3 below:


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Figure 3: Electricity Price Build-up

Typically between one half to two thirds of the end consumer price is made up of generation and transmission costs over which the distributor has little or no control. Figure 4 shows the estimated contributions that each sector makes to the final price of electricity in Namibia in 2012/13:

Figure 4: Electricity Price Composition

Generation

Transmission

Distribution

Consumer

Asset Cost

Operating Cost

Imports Cost

Asset Cost

Operating Cost

+

+

NamPower Bulk Tariff

Asset Cost

Operating Cost

Customer Service Cost

End Consumer Tariff

Fuel Cost

LA Surcharge


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The ECB is responsible for regulating electricity prices. Their control applies equally to the NamPower bulk price and the end consumer price. The ECB has established tariff determination methodologies for all sectors of the electricity industry. This implies that NamPower and the distributors have to approach the ECB when they wish to increase their tariffs. This normally happens once a year in sync with the financial year of the utilities which runs from July of one year to June of the following year.

In the tariff review process it is the licensees’ responsibility to present to the ECB its cost forecast and propose tariffs which are designed to recover these costs from the consumer. It is the ECB’s duty to review the costs presented by the licensee to make sure that these costs are reasonable and justifiable. The ECB also reviews the proposed tariffs to ensure fairness and avoid unreasonable tariff changes. This review process may take two or three rounds before final costs and tariffs are approved. It is primarily the licensees’ responsibility to communicate with its customers during this process and once tariffs have been approved. Customer concerns and views should be incorporated into the tariff design submitted to the ECB by the licensee.

3 APPROACH AND METHODOLOGY

This section briefly explains our approach to this assignment.

3.1 APPROACH

We have collected electricity tariffs from a number of RSA and Namibian electricity distributors valid for 2012 to 2013. The RSA entities are a mix between the largest cities and some smaller places which are more comparable in size to the Namibian municipalities. For Namibia we have included the NamPower Distribution tariffs for comparative purposes. We have also included the tariffs charged by City of Windhoek, NORED Electricity, Erongo RED (Walvis Bay) and CENORED (Tsumeb). Swakopmund and Otjiwarongo have been omitted from this update because they have the same tariffs as Walvis Bay and Tsumeb respectively. We have also included data on Botswana.

We have used the same NMA member consumption data collected in 2004, updated in 2011 with two NMA members who are on time of use tariffs.

We have compiled the above data into a spreadsheet and calculated the total electricity bill for all the sample consumers if they were supplied by each of the municipalities.

3.2 ASSUMPTIONS / LIMITATIONS / NOTES

“NamPower” when used in the figures and compared to other distributors means NamPower Distribution, NOT NamPower Transmission. NamPower Transmission is referred to as “NamPower TX”.

Some distributors do not have time of use tariffs or no flat tariffs. For this reason the non-time of use consumers could not be modelled on some places.

Some of the RSA tariff sheets lacked information on how the tariffs are applied. We have used our discretion to use the most likely applicable tariff options and charges. Where seasonal rates are used we have computed a weighted average and recorded it as a flat tariff.

The tariffs in Botswana are low compared to RSA and Namibia. However essentially the utility company in Botswana is facing financial difficulties as a result of this, and power blackouts are regular and widespread. The Botswana data is still provided for information, but must not be regarded as a reasonable comparator.


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The consumers modelled in this analysis have certain unique usage profiles. These profiles may not be universally representative of members of NMA and are certainly not representative of all consumers served by the electricity distributors. Therefore the results shown in the present report may not apply equally to all NMA members and can certainly not be used to make statements about general price increases in the electricity industry.

4 BACKGROUND

4.1 NAMPOWER TREND

Figure 5: NamPower Average Price1

The above figure shows the development of NamPower’s revenue per kWh sold (derived from NamPower’s annual reports). This shows that since 1995 the bulk electricity price has gone up by a factor of more than 5 and since 2004 it has more than doubled. It is also evident that the rate of increase has been higher in the last few years than in the decade before.

All electricity distributors (from whom the NMA members buy their electricity) buy their bulk electricity from NamPower. Usually the bulk electricity cost makes up between 50% to 70% of a distributor’s cost.

1 The years in this chart refer to NamPower’s financial year ending in June of the referenced year, i.e. 2011 applies to NamPower’s 2010/2011

financial year. The figures for 2011/12 are not yet publicly available at time of writing. Data source is the NamPower annual reports.


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Figure 6: Namibia Electricity Sourcing

One key factor influencing NamPower price development is the demand growth experienced in the last decade, coupled with increasing reliance on imports of electricity which carry sharply increasing costs. Although the growth curve has slowed from 2008 it has picked up again with the new mines being developed in Namibia.

Most growth in electricity demand in Namibia now has to be supplied from imports (because little additional generating capacity has been developed in Namibia). If those imports happen at peak or standard times (in TOU terms) then they often carry high prices, which in turn drives up the average cost of bulk electricity in the country. The additional turbine being installed at Ruacana will help provide power at peak times at a more reasonable rate, and the new diesel power station in Walvis Bay will also help provide power at peak times (although at a fairly high cost). Despite these initiatives by NamPower the role of imports will be big until a larger base load power station is built in Namibia.

4.2 GENERAL ELECTRICITY PRICE DEVELOPMENTS IN NAMIBIA

Figure 7: Namibia Electricity Price Development


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Figure 7 above shows the electricity price index since 2006/7 per distribution area. It shows that for all areas except NORED the price has more than doubled since 2006/7. During the same time the NamPower price has increased by a factor of about 2.5.

4.3 DOMESTIC VS COMMERCIAL PRICES

Figure 8: Commercial vs Residential Tariffs in Namibia

Figure 8 shows the difference between commercial (large power user) and domestic tariffs in the sample of Namibian distributors. In Namibia the residential tariffs are higher than the commercial tariffs except for Tsumeb (CENORED) and Oshakati. The residential tariff used as reference is the prepaid tariff applicable at 500kWh/month. Generally the difference between the commercial and domestic tariffs in Namibia is not huge.

Figure 9: Commercial vs Residential Tariffs in RSA

Figure 9 shows the difference between large power user and domestic tariffs in South Africa. As in Namibia the difference between commercial and domestic tariffs is not large.


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5 KEY FINDINGS

5.1 THE TARIFFS

The table below shows the tariffs of the various Namibian and RSA distributors that we have obtained.

Figure 10: Electricity Tariffs

From the above table one can make the following observations:

Demand charges in RSA are no longer necessarily lower than in Namibia.

Energy charges in RSA are generally lower than Namibia, however not in all cases.

Demand charges vary substantially between distributors, both in RSA and Namibia

Electricity tariffs in Botswana are lower than those in both RSA and Namibia (although the demand charge has risen to a comparable level).

5.2 COMPARING NAMIBIA TO ITS NEIGHBOURS

The figure below shows the average monthly electricity bill that would be experienced by the six sample consumers if they were supplied by the selected South African or Namibian distributors or by BPC. The load factor for the sample consumers is also shown on the chart to illustrate the effect that load factor can have on average electricity cost. Load2 factor is a measure of the utilisation of purchased capacity (maximum demand).

2 See section 9.6 for a definition.

Basic

N$/month

Demand

N$/kVA/

month

Access

N$/kVA/

month

Non-TOU

Energy

c/kWh

Energy Hi

Peak

Energy Hi

Standard

Energy Hi

Off-peak

Energy Lo

Peak

Energy Lo

Standard

Energy Lo

Off-peak

Citypower JHB 10 182.00 145.24 71.75 206.00 98.00 61.00 95.00 71.00 58.00

Port Elizabeth 2 113.00 108.00 63.45 253.00 73.00 43.00 78.00 58.00 39.00

Bloemfontein 2 100.00 84.54 29.59 101.00 221.00 90.00 86.00 94.00 56.00 48.00

Kimberley 712.00 104.50 73.12

Potchefstroom 1 199.00 75.78 105.50 311.00 110.00 64.00 117.00 76.00 56.00

Eskom 1 530.00 14.84 72.90 233.00 72.00 36.00 76.00 53.00 32.00

Demand Access

Windhoek - 93.00 97.20 230.00 133.00 68.00 103.00 88.00 66.00

Walvis Bay 1 100.00 90.00 86.00 104.00 205.00 134.00 99.00 113.00 97.00 74.00

Tsumeb 700.00 170.00 - 124.00 230.00 160.00 125.00 130.00 115.00 92.00

Oshakati 920.00 167.00 - 101.00 209.00 138.00 103.00 108.00 93.00 70.00

NORED 770.00 135.00 90.00 198.00 130.00 85.00 99.00 83.00 54.00

NamPower 1 000.00 114.01 74.06

Botswana 50.26 109.61 39.07

Large Power User Tariff


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Figure 11: Average Electricity Cost for Different Consumers

A low load factor (low utilisation of capacity) has a large detrimental effect on the average cost of electricity, as illustrated by the sample consumer “Non-TOU 2”.

The bill in Namibia is higher than in RSA and in Botswana for all cases.

Figure 12: Average Electricity Cost – Windhoek vs Johannesburg

Using tariff data for Windhoek and Johannesburg only (instead of country averages) reveals almost equal costs on TOU while the gap on most other consumers is smaller than when using the country averages.


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Figure 13: Fixed Cost / Total Bill

Looking at fixed cost as portion of the total bill reveals that in Namibia and South Africa the fixed part of the bill is roughly the same, and both are much less than in Botswana. Up to three quarters of the electricity bill is for energy consumed, which in turn implies a high incentive for energy efficiency (i.e. to reduce the bill by using less energy where possible). Those consumers with low load factors (non-TOU 2 and 4) have a higher fixed component to their bill because they use relatively little energy compared to the capacity they have available.

5.3 DEVELOPMENT OVER TIME

Figure 14: Average Price Difference between ZA and NA

The price differential between Namibia and RSA has decreased sharply since 2007. Currently the average Namibian price is only about 25% higher than in South Africa whereas it was 70% higher five years ago. There has not been much change since 2011.


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Figure 15: Average Commercial Price Development

Since 2004 the average electricity cost for commercial consumers has more than doubled in Namibia. In South Africa and Botswana it has also more than doubled, although the price in Botswana is still little more than half of that in Namibia.

Figure 16: Fixed Charges vs Total Bill

The percentage of the average electricity bill coming from fixed charges (demand, access and basic charges) in Namibia has decreased from 50% in 2004 to around 30% in 2012. In South Africa it has also decreased by about the same percentage. In Namibia a small increase can be seen from 2011 to 2012, because fixed charges were increased about as much as energy charges. In previous years energy charges were increased more than fixed charges.

The reduced fixed part of the bill and rising energy prices present an increasing opportunity for energy efficiency, since energy saved now has a much more pronounced effect on the total bill than before. Managing demand is however also still important as wasted capacity is still expensive.


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5.4 COMPARING DIFFERENT AREAS IN NAMIBIA

The analysis computes the average electricity bill for the six sample NMA members for different areas in Namibia.

Figure 17: Commercial Electricity Cost per Area in Namibia

From the above it is clear that CENORED’s commercial tariffs are still significantly higher than the other areas that have been investigated, however the gap has decreased since 2011. Most other areas have roughly the same level of average cost with the exception of Oshakati which lies between CENORED and the rest.

Figure 18: Demand Charges3 per Area in Namibia

The demand charges in Erongo RED and CENORED and Oshakati are markedly higher than those in most other areas. Notably Windhoek’s demand charges are extremely low.

3 Demand and Access charges are added here, which is a simplification since in practice they are not just added up. The above picture would

therefore be true only for consumers with a very flat load profile over the year. Actual demand plus access charges paid by most consumers will be less than the illustrated value.


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Figure 19: TOU4 High Season Rates

The pattern of high season time-of-use charges is similar for most areas in Namibia.

The only notable exception is Windhoek which has a very high peak energy rate while it has a very low off-peak rate. This means that consumers on TOU are hard hit in Windhoek during the months of June through August (high demand season). This is a trend already observed in 2011, but has reduced in severity this year. It is expected that within one to two years Windhoek will align with the other areas in this regard.

Figure 20: TOU Low Season Rates

Looking at the low season rates it is only NORED which is slightly out of line with a lower off-peak rate. During most of the year therefore Windhoek’s consumers will not face the high peak rate which applies during the winter months.

4 Hi-P = Peak, Hi-S = Standard, Hi-O = Off-Peak. High season is June through August. Low season is the rest of the year.


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6 ADDITIONAL ISSUES

6.1 ACCESS CHARGES VS DEMAND CHARGES

Erongo RED is still the only distributor to have followed NamPower’s lead of splitting the old demand charges into network access charges and new (reduced) demand charges. Network access charges are charged on the highest demand taken in the last 12 months while demand charges are charged on the demand taken in a given month. This brings some relief to consumers with varying demand.

In comparison with 2011 Erongo RED has only increased its demand charge and left the network access charge constant. This favours consumers with varying demand, and it is our understanding that this has been done with the seasonal consumers in Walvis Bay in mind.

6.2 FUTURE ELECTRICITY PRICING OUTLOOK

The Southern African region is still in the middle of an electricity supply crisis. Eskom in RSA has run out of the excess capacity that has for many years supplied cheap electricity to the Region (cheap when compared to international electricity prices). Eskom is likely to keep getting high tariff increases for some years into the future, and this will be reflected also in distribution tariffs for that country.

In Namibia this trend has to some extent been mitigated by Ruacana power station which produces at a cost much lower than other local power stations or most imports, but nevertheless NamPower has received tariff increase of more than 15% per year for some years. This trend is expected to continue or get worse over the coming three to four years as demand in Namibia is expected to grow and the additional energy required will come at a high price, driving up the average cost of electricity. The cost of any new power stations to be built will inevitably be higher than the current generation mix, and will push prices up further. The benefit will however (hopefully) be stable power supply.

In most areas of Namibia the electricity distributors have reached cost reflectivity5, and therefore their tariff increases should generally be lower than NamPower’s (because up to two thirds of their cost is the NamPower bill and the other third depends largely on inflation which is generally lower than NamPower’s price increase). The largest distributors’ tariff increases in 2012 are all below the increase granted to NamPower. This trend is expected to continue in most areas.

7 CONCLUSIONS

We make the following conclusions from the above analysis:

The price margin between Namibia and South Africa has remained almost since 2011 at around 25%.

Within Namibia significant differences in price levels are observed (see Figure 17). Of the distributors sampled CENORED has the highest prices, for commercial consumers up to 40% higher than other urban areas. The reasons behind this are many, but for energy intensive consumers this makes the CENORED area unattractive. Between the other urban areas sampled the difference in price is relatively small.

In general energy intensive commercial consumers are advised to locate in one of the larger towns. Areas currently served by NamPower Distribution (such as the plots north of Windhoek) are also attractive; however it is likely that NamPower Distribution may be absorbed into REDs or into local authorities at some point in the future (negotiations are currently under way for City of Windhoek

5 See section 9.1 for more information.


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to take over the electricity supply in the Brakwater, Nubuamis and Döbra areas from NamPower). It is therefore not clear how long the advantage of NamPower Distribution’s lower tariffs will be sustained.

Demand charges vary between distributors in Namibia (see Figure 18), with Windhoek’s being very low and Erongo RED and CENORED being high. This is to some extent offset by higher energy rates in places with low demand charges (for example Windhoek’s high peak energy rate). High demand charges are unattractive to consumers with a “peaky” load profile, i.e. who consume less energy compared to their maximum demand. However at the end of the day it is the combination of demand and energy cost that counts. Over time the difference between areas is expected to decrease as tariffs are harmonised.

Many distributors have by now introduced time-of-use tariffs, which offer an opportunity to shift consumption to lower priced times. The slope from peak to off-peak energy rates is similar for all distributors except Windhoek in high demand season (see Figure 19). The differential between the three time slots clearly indicates how much can be saved by moving energy use to standard or off-peak periods.

Energy rates have increased more than demand and fixed rates for the past number of years, but this has changed between 2012 and 2012 where both were increased almost equally. This still presents an opportunity for energy efficiency to reduce energy consumption.

8 POSSIBLE NMA ACTIONS

The following are possible actions emanating from the above that the NMA and/or its members could consider:

NMA should advise its members (specifically in Windhoek, but also elsewhere) to monitor their electricity bills closely during and shortly after implementation of TOU tariffs by their electricity suppliers. To our knowledge there have been many teething problems, and consumers should make sure that they are billed correctly.

All consumers should review their demand or capacity taken from the electricity supplier and consider whether reductions in demand are possible while maintaining production. Despite their decreasing role in the overall electricity bill they still pose a significant cost.

All consumers should continue to budget for electricity tariff increases in the range between 10% and 15% per annum. Some areas and/or tariff categories may increase even more than this.

The NMA should continue and expand its dialogue with electricity distributors to inform the NMA members early of pending tariff increases and changes in tariff structures and take NMA concerns into account when devising tariffs.


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9 ANNEX: A BRIEF INTRODUCTION TO ELECTRICITY PRICING TERMINOLOGY

9.1 COST REFLECTIVITY

The electricity tariff methodology adopted by the Electricity Control Board (ECB) embraces the key principle of cost reflectivity. This implies that the price paid by the consumer should relate to the actual cost of producing and transporting the electricity as closely as possible, both in terms of tariff level and tariff structure.

An electricity licensee is considered to have reached “cost reflectivity” when its projected revenue from tariffs would meet all its projected costs in full. Licensees who have not reached cost reflectivity usually require higher tariff increases than those who are cost reflective because they need to reach cost reflectivity.

Specific events can also influence the cost reflectivity of a licensee. For example Erongo RED was nearly cost reflective before it needed to incur huge costs for upgrading its supply capacity from NamPower for the central coast. Recovery of these additional costs has caused Erongo RED to be less than cost reflective again and has resulted in continued high tariff increases.

9.2 TARIFF STRUCTURE AND CHARGES

Tariff structure refers to the various tariff charges / components levied on the consumer:

Basic charges are fixed charges per consumer per month – theoretically they should reflect the fixed network costs to connect the customer as well as monthly administrative costs associated with providing customer service, meter reading and billing.

Capacity charges are charges per Amp or kVA at which the installation is rated (contractual supply capacity) per month. Theoretically this should relate to the cost of the local installation supplying the consumer, plus administrative monthly costs. In some cases the capacity charge is called basic charge (but is differentiated by circuit breaker rating, making it a capacity charge).

Energy charges are charges for energy consumed, i.e. per kWh. This should relate to the cost of generation, i.e. producing the electrical energy.

Demand charges are charged for the highest half hourly maximum demand consumed by the customer. This should relate to the transmission and distribution network cost, i.e. the cost of transporting the energy to the consumer as well as the fixed component of electricity production.

9.3 TARIFF LEVEL

The tariff level relates to the amount of money charged for each of the tariff charges. This should relate to the true costs attached to each tariff charge.

In practice it is impossible to make tariffs reflect the true costs 100% in the tariff structure and level. Some tariff components therefore over-recover while some under-recover in relation to true costs. This is unavoidable, but it is the responsibility of the electricity supplier to manage this carefully and responsibly in the interest of the financial health of the supplier as well as the consumer. The function of the ECB is to regulate tariffs and to ensure that consumers are protected while suppliers must be viable and cost reflective.


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9.4 PRICING SIGNALS

The term pricing signals refers to the effect tariff design approaches have on the consumer, e.g. a low energy charge and high demand charge tell the consumer to use a lot of energy (because it is cheap) but at the same time to minimise the maximum demand used to consume that energy (because demand is expensive).

It is the responsibility of the supplier to carefully consider the pricing signals given to consumers, especially when cross-subsidies are involved or when risk management demands that tariffs be designed in a way that is not cost reflective.

9.5 AVERAGE ENERGY COST

We refer to average energy cost or average c/kWh as the amount per kWh which is calculated by taking the total electricity bill (excluding VAT and ECB levy) and dividing it into the total number of kWh consumed in that period.

The average c/kWh is what the consumer is paying effectively for his electricity (including the supplier’s energy rate, demand charges, basic charges). It is a better indicator of real costs than only looking at the c/kWh energy rate charged by the supplier.

9.6 LOAD FACTOR

Load factor is a measure of how well available capacity is utilised, e.g. a load factor of 100% implies that the full capacity of the connection is utilised all the time. For example a business that operates fully for 8 hours a day, 7 days a week is likely to have a load factor of around 35% (8/24 operating with some small loads running all the time).

Load factor is important when demand charges are levied. Demand charges are levied on the highest half hourly demand in the month. The ideal would be to use the same demand all the time – this would minimise the overall average cost per kWh paid by the consumer. So it can be said that the higher the load factor the lower the average cost per kWh should be.

Load factor also has an influence for non-demand consumers who usually pay a capacity charge per Amp of the circuit breaker supplying them. Improving the load factor by reducing peaks in demand could make a reduction in capacity possible, leading to savings on capacity charges.

december 2012 submitted to: namibia manufacturers ...€¦ · 9.1 cost reflectivity ... included...

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